A major reason for
Australia’s continued economic growth is the relative stability of
labor costs. Blowouts of labor costs were very damaging in the
mid 1970s, the early 1980s and again in the early 1990s. This time
round, the boom has continued, thanks in part to contained labor costs.

Recently there has been a lot of
discussion of skills shortages, yet overall wages growth has increased only
slightly. Productivity growth has been strong, helping restrain labor costs,
but recently productivity growth has slowed, and on some measures has become
negative. These facts have represented a warning, but today the AFR rings the

One of the reasons for subdued labor
costs is that the Australian labor market is far more competitive than suggested
by the low official rate of unemployment, as we have argued. Which parts of the
labor market are likely to face the strongest demand pressures and the most
accommodating paymasters? No prize for guessing – health, education, public
transport workers and police forces in the states, all of whom are governed by
the ALP.

Surprise, surprise, the AFR has put together all the
state budgets and learned that labor costs are set to rise by 6% in the
current financial year. “State governments face a blow-out in
public-sector wages in coming pay negotiations after forecasting a $3.4
billion increase in their employee-related costs for the current
financial year.”

The AFR editorial spells out the
likely consequences. “No amount of industrial relations reform will have any
effect on spiralling public sector wages if governments won’t take a stand with
unions. As The Australian Financial Review reports today, state governments are
looking at a wage cost explosion of up to 6% over the next year. It’s
the one warning that stood out in blazing lights in state budgets this year, but
Labor premiers seem to have no plans to bring it under

Read the full report here.

Peter Fray

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